Kaydon

Kaydon Corporation NYSE: KDN ($43.80)

by Mark Hokanson

Conclusion:

Kaydon Corporation (KDN) is a leading designer and manufacturer of custom-engineered, performance-critical products that offers a baseline EPS growth of 13% 18% in 2008 and 2009 respectively. With a net cash position of $87mm (net debt/cap of -13%) and with the option to call $200mm of the in the money 4% subordinated convertible notes (strike price $29.16) due 2023 on May 30th, 2008, KDN offers investors substantial financial firepower for M&A and cash redeployment opportunities. We look for eps of $2.71 and $3.02 in 2008 and 2009 respectively. Our DCF and trading multiple analysis yields a price target of $55.

4% Subordinated Convertible Note: KDN has the option to call $200mm of coverts due in 2023 after May 30th of this year. These converts are significantly in the money with a strike price of $29.16. We feel the stock has downside protection as the lower the stock trades; the more likely KDN is to call.

key stats

Key Statistics
Market Cap.	1.22B
Enterprise Value	1.14B
Avg. Volume	387K
Trailing P/E	18.16
Fwd P/E	14.17
PEG	1.21
Price/Sales	2.73
Price/Book	2.52
EV/EBITDA	9.61
Beta	1.63
ROA	9.10%
ROE	16.90%
52 wk High	58.49
52 wk Low	38.9

Repurchase Authorization:

KDN BOD reauthorized an additional stock repurchase plan in 2007 of 500,000,000 shares. In 2007, KDN repurchased 601,974 shares for an average price of $50.0 a share. With a net debt position of ($87mm) we believe KDN has the ability to repurchase up to 20% of its common stock while maintaining a net debt/cap ratio of 20%. A 5% ($70mm) reduction in share count will add $.14 to our baseline FY08 earnings. However, we are mindful that KDN only repurchased about 55,000 shares from Feb. 22nd through April 4th at an est. avg. price of $43.40, 16% lower than prices levels in q4:07

Price Target of $55/share:

We value KDN using the average of a 1yr forward trading multiple of 18.2x, 2009 EV/EBITDA multiple of 9.5 and DCF (10% and 5% WACC and terminal growth rate respectively).

Tough Q1 y/y compare:

Due to the direct start-up expenses, short-term outsourcing cost, and lost overhead absorption associated with the relocation of KDN’s Sealing Product segment to a lower cost facility, KDN will have a tough q1 y/y compare. Street consensus seems to already take this into account as q1:08 eps consensus is only marginally ($.01) above q1:07 reported eps ($.52/share).

Company Profile:

Kaydon Corporation designs, manufactures, and sells custom engineered products in North America, Europe, and Asia. It offers friction control products, such as anti-friction bearings, split roller bearings, and specialty balls used in specialized robotics, medical, aerospace, defense, security, electronic, material handling, construction, alternative-energy, and other industrial applications. The company also manufactures velocity control products, including industrial shock absorbers, safety shock absorbers, velocity controls, gas springs, and rotary dampers used in specialized robotics, material handling, machine tool, medical, amusement, and other industrial applications. In addition, it offers sealing products, such as engine rings, sealing rings, and shaft seals for industrial, aerospace, and defense applications. Further, Kaydon Corporation provides filter elements and liquid and gas-phase filtration systems, metal alloys, machine tool components, presses, dies, and benders used in various industrial applications. The company was founded in 1941 and is based in Ann Arbor, Michigan.

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